What do central banks do?

Most central banks utilise an inflation target, where their primary objective is to deliver low and stable inflation. And this is how we typically judge whether they are doing their job. For example,

•  The Bank of England has an explicit 2% inflation target.
•  The European Central Bank is supposed to deliver “price stability”, which they believe is “best maintained by aiming for 2% inflation over the medium term”.
•  The Federal Reserve has a “dual mandate”, which is a twin objective of delivering maximum employment and stable prices.

However, many economists question whether this is the best way to conduct monetary policy. Instead of trying to keep consumer prices stable and assume that other important variables will follow from that, an NGDP target aims for a stable environment for all wage and debt contracts, because labour and credit markets are more important for economic planning than a specific set of consumer prices. Indeed, NGDP is less volatile than CPI, and NGDP is more relevant for concerns about debt sustainability.

It is therefore interesting to see that even back in 2012 NGDP targets were receiving attention from important central bankers:

• The former governor of the Bank of England, Mark Carney (see here)
• The former chair of the Federal Reserve, Janet Yellen (this speech has been widely interpreted to incorporate attention to NGDP growth in policy decisions)